However, there are advantages too, such as reducing the pressure on sales people to focus on short-term outcomes rather than long-term relationship building and allowing the company to develop and implement effective marketing or selling strategies on a firm-wide basis, rather than having to constantly deal with the “me versus the company” attitude that oſten results from purely commission-based systems. These systems require much more management. Option 3: Draw against percentage of contribution or value added We believe that the object of any sales compensation


system should be to align the sales rep’s objectives and efforts with those of the firm. Clearly, the most obvious way to achieve this is to build the commission compensation plan around a percentage of contribution to overhead, as that is what the firm should be trying to maximize. Substantially the same effect can also be obtained by using a commission based on a percentage of value added (VA). The advantage of using a VA approach is that it is much easier to calculate and less subject to questions about how it is determined than is contribution, which involves less precise accounting definitions. VA is simply sales, less materials and outside purchases, and should therefore be easily determined from the estimate. Naturally, the percentages used should reflect the basis of the calculation used, with the ultimate goal


ABOUT THE AUTHORS


Gerry Michael is a CPA/consultant who has focused his practice on the printing


industry for nearly 35 years, first as the founder of GA Michael & Company and later as graphic arts lead partner at Carlson Advisors. Currently, he is the graphic arts principal at Falco Sult, a West Coast CPA and consulting firm, working with printers across the country on management and strategic planning issues. He is a frequent speaker at industry meetings and con- tributes to various industry publications.


Bob Lindgren is management and business advisor for Printing Industries


Association of Southern California and its president/CEO emeri- tus. He has worked with printers in Los Angeles and Chicago for more than 50 years. He has an MBA in accounting and finance from the University of Chicago.


of managing the overall cost of sales commissions at the company level. By way of example, assume that the company currently has an eight-percent commission on gross sales and wishes to move to one of these methods. Let’s also assume that average VA is 60 percent of sales and average contribution is 40 percent. In this case, either a VA-based commission of 13.4 percent or a contribution-based commission of 20 percent will produce results identical to a commission based on eight percent of total sales. There is a major difference in the incentives that are now available to the sales force, which will increase their compensation whenever they sell jobs that are higher profit and reduce compensation when less profitable sales are made. If implemented consistently, this approach should


reduce the need to alter the commission on jobs with either discounts or price increases, since both the company and the employee will share proportionally in the results of such pricing policies. A further advantage is that the VA approach accommodates the increase in buy-outs as the firm works to meet the total needs of its customers. Of course, if a salary-plus-bonus approach is to be


used, then it needs to be structured in a similar way but also requires a set of specific targets that must be achieved to retain or increase the rep’s salary and to earn a bonus.


What About Implementation? If the firm has decided to change from a traditional


percentage of gross to a contribution or VA approach, the reality must be faced that any change in the sales compensation system will be greeted with fear and loathing by the sales staff even if it will ultimately give them greater opportunities. A useful way to introduce change is to offer to calculate sales compensation using both the old and new ways, paying the higher of the two for a transition period. If the new approach is properly designed, most sales reps will find that the desired behavior changes produce more income for them—if they don’t change, they’ll leave.


The Magazine 14 Forecast | 2018


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